Cyprus Mail
CM Regular Columnist Opinion

The economics of the coronavirus #2

BY TALKING on the phone to various friends and acquaintances, watching TV and listening to the radio, it seems there is a lot of confusion about the economic impact of the coronavirus pandemic as well as the measures taken, and those in the process of being taken, to mitigate problems to the economy.  On this note, I seek to dispel certain misconceptions so that the average citizen, who is unfamiliar with the subject, can evaluate the situation.

The measures can be divided into three categories: (a) The provision on the part of the ministry of labour of a special allowance to employees of enterprises that have wholly or partially suspended operations. The allowance covers a period of almost one month and entails an obligation on the part of the employer to pay “normal salaries” for the two-month period.  (b) The deferral of the obligation to pay lending institutions loan instalments until the end of 2020 on condition the borrower was not in arrears at the time the pandemic struck.  (c) The possible provision of additional financing or, alternatively, the extension of the period over which the employees of affected enterprises are entitled to an out-of-work allowance, on condition that no employment contracts are terminated.

The profitability and the liquidity of an enterprise are almost identical concepts? This is incorrect. The profit realised by an enterprise is the value of turnover after deducting costs such as raw materials, salaries and wages, rent, and depreciation of machinery and buildings.  Certain of these expenses are variable in proportion to the volume of sales, while other costs are fixed, and they accumulate irrespective of whether the enterprise has sales or not. To the extent that the costs incurred exceed the revenues generated, a loss is realised, which burdens the business owners. Where the owners’ capital is insufficient to absorb the losses, they are automatically “rolled over” to the creditors of the “bankrupt” enterprise.

The liquidity of an enterprise is measured by the cash it has at its disposal, at a given moment. A loss-making enterprise may have an adequate level of liquidity if, for example, it has recently contracted a large loan, while a profitable enterprise may be short of cash if it has recently acquired substantial long-term assets.

The measures announced aim at minimising redundancies by rendering it easier to secure, through loans, the necessary cash to cover the salaries of otherwise redundant employees. This approach on the part of the state induces business concerns to generate losses and could ultimately lead to their bankruptcy. The practice of financing losses with borrowed funds simply conceals, for a short while, the unemployment generated by the recession.

The banks have an obligation to carry part of the burden generated by the pandemic? This position is also incorrect given that the banks are still suffering from the wounds inflicted by the 2013 economic crisis.  The risk of a new banking crisis is real. The banks are not generating super-profits. They were and still are confronted with strong resistance on the part of their unionised employees against every effort made to improve profitability by lowering payroll costs.

The existing non-performing loans and the justified fear that new non-performing loans may be generated by the recession have induced the Cypriot banks to have inert cash balances amounting to €15 billion. The root of the problem is the difficulties experienced by the banks to identify creditworthy borrowers. Under these conditions, to force the banks as has been suggested, to lend money to non-creditworthy customers is likely to lead to the bankruptcy not only of the borrowers but also of the banks themselves.  Someone may rush to point out that as proposed, these loans will be backed by a state guarantee to the tune of 70 per cent.  The crucial question is whether the state is in a position to force a bank to assume risks, which the bank itself judges as unacceptable. In my opinion, it cannot.

The argument advanced by many politicians is that the state did help the banks to cope with the problems confronting them not so long ago and, therefore, they have, now, an obligation to reciprocate.  This is a false argument. I would respectfully remind the reader that the shareholders and the bondholders of the Bank of Cyprus as well as of Laiki have lost all (yes, all) the money they had invested.  With the exception of depositors who had up to €100,000, those who carried a substantial part of the burden of saving the banks were the remaining depositors to the tune of 50 per cent of their deposits in the case of the Bank of Cyprus and 100 per cent in the case of Laik).  The protection of the small depositor was an act imposed not only by the necessity to save the economy from total collapse but also because of the moral obligation of the state stemming from its deficient supervision of the two large Cypriot banks, which facilitated the concealing of unacceptable risks and of questionable acts.

Finally, I feel obliged to point out that the argument that the European Central Bank has relaxed the rules on the basis of which the necessary provision for uncollectible debts is quantified is a kind of a “smoke bomb”.  These rules aim at quantifying the real exposure of a bank – admittedly a difficult task – and at ensuring that banks do not recognise fictitious profits. Solving such a problem by simply lowering the yardstick reminds me of fairytales that must have a happy ending.

,The fact that the state, the taxpayer, has a social obligation to secure a minimum allowance for all those who have found or will find themselves through no fault of their own, unemployed is a position with which I am in full agreement.  However, such an allowance must be kept to a minimum and must be given only to those whose other income or wealth is insufficient to cover their needs.

In the extended public sector, salaries should be curtailed and the savings utilised to cover the needs of those who are totally exposed and unprotected. In all honesty, I do not see the logic of calling the taxpayer to pay direct and indirect taxes in order to subsidise others in either the private or the public sector who have other income or wealth sufficient to absorb the impact of the pandemic.


Christos Panayiotides is a regular columnist for the Cyprus Mail, Sunday Mail and Alithia


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